On February 8, 2011, the IRS announced a second voluntary disclosure program that will allow US taxpayers to disclose offshore accounts that were previously kept secret from the IRS. U.S. citizens and resident foreign nationals are required to pay U.S. federal income tax on their worldwide income. The objective of this initiative is to bring taxpayers that have used undisclosed foreign accounts to avoid or evade taxes into compliance with United States tax laws. Taxpayers are being encouraged to take advantage of this program in light of the IRS initiatives to crack down on international tax evasion.
Although the disclosure will allow taxpayers to avoid possible criminal prosecution, which could include jail time, and to pay lower penalties than might otherwise be imposed if these offshore accounts are discovered in an audit, the disclosure will not be penalty-free. In fact, in many cases, the penalties due will be higher than the penalties that would have been due had the taxpayer come forward during the first voluntary disclosure program, which closed on October 15, 2009.
The new voluntary disclosure program generally provides for the following:
- General Penalty of 25 Percent. Taxpayers are generally required to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period.
- Lower Penalty of 12.5 Percent for Small Accounts. Taxpayers with offshore accounts or assets with an aggregate value that did not exceed $75,000 in any calendar year covered by the 2011 initiative will qualify for a lower 12.5 percent penalty.
- Lower Penalty of 5 Percent in Limited Circumstances. An even lower penalty of 5 percent is available for certain taxpayers if either: (a)(i) the taxpayer did not open the account or cause the account to be opened, (ii) the taxpayer had infrequent contact with the account, (iii) except for withdrawals to close the account, the taxpayer did not withdraw more than $1,000 during any year covered by the program, and (iv) the taxpayer can prove that taxes were paid on deposits to the account, or (b) the taxpayer is a foreign resident and did not realize the taxpayer qualified as a U.S. citizen.
- Amended Returns. Participants must file all amended and original returns for the 2003 to 2010 tax periods.
- Back-Taxes, Interest and Accuracy-Related and Delinquency Penalties. When filing amended and original returns, taxpayers are required to remit any back-taxes, interest and accuracy-related and delinquency penalties that may be due.
- August 31, 2011 Deadline. All documentation required to participate in this program and all back-taxes, interest and accuracy-related and delinquency penalties must be submitted no later than August 31, 2011.